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Putin Pulls Another Ace From His Sleeve In Big Gas Deal With China

For Vladimir Putin’s reputation as a geopolitical necromancer, the $400 billion gas deal with China couldn’t have been timed better.

The Russian president scoops up numerous take-homes. First, while Western corporate leaders reluctantly heed Washington’s plea to avoid this weekend’s economic summit in St. Petersburg, Putin demonstrates that attempts to isolate him are a lost cause.

Second, not only do the Chinese invite him in from the cold, but they write him a check. So, while the West fumbles with economic sanctions over Putin’s support for separatists in Ukraine, Putin takes down payment on a long-term deal that will make Russia less vulnerable to this sort of pressure.

Third, the Chinese actions also provide tacit acquiescence to Russia’s seizure of Crimea, while Russia reciprocates in relation to China’s oil exploration in disputed seas off Vietnam.

And topping this off, Gazprom reaps a fair price for exporting 38 billion cubic meters per year of previously stranded Siberian gas. The price being reported is roughly $10 per million British thermal units. According to news reports, China will even finance some of Russia’s infrastructure investment, doing so in its local currency, the reminbi, which safeguards the project from western sanctions.

For the Chinese, there is also plenty to be happy with.

China manages to obtain European prices on gas delivered into the Asian market, where prevailing prices are often one-third higher. Russia, which supplies a larger amount of gas to Europe, will be using this pipeline to make a virtual connection between the two markets. That has implications for prices in Asia and for firms – including American firms – investing in LNG export facilities with hopes of arbitraging gas into that same market.

And China procures a new supply of energy that does not depend on the “protection” of the US Navy for its safe delivery. The US Fifth Fleet watches over Chinese oil and gas shipments as they depart the Persian Gulf and the US Seventh Fleet oversees them as they enter the Pacific. The pipeline from Russia allows China to secure a source of supply that is not vulnerable to this strategic risk.

For the rest of the world, the deal is something to watch. If it comes to fruition, the market effects will have to be reckoned with. Cross-border pipeline projects are notoriously fraught with risk. Many never happen. Whatever transpires, Russia’s breakthrough demonstrates that, while many players will vie for the Asian market, Putin will compete with all of them.

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